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Filing for 2010: Tax Changes for Small Businesses and the Self-Employed

April 15th is fast approaching and it is important to remember that 2010 was a big year for small business owners as it relates to tax law changes. The Small Business Jobs Act of 2010 provided a number of key tax changes designed to benefit small business while the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 kept a number of key tax items the same. Before preparing 2010 tax forms, the self-employed and small businesses should be aware of tax law changes.

The following tax law changes relate to 2010 returns:

Self-Employed Health Insurance Deduction – As always, the premiums paid for health insurance by the small business owner will be deducted on page one of form 1040. But for 2010, those same premiums can be included on Schedule SE, Self Employment Tax as a deduction reducing net earnings from self employment and reducing the related Self Employment Tax. This can be up to a 15.3% savings on the cost of health insurance.

Increase in Maximum Section 179 Deduction – The maximum allowable deduction under Code Section 179 was increased from $250,000 to $500,000 providing additional incentive for small businesses who invest in new equipment. At the same time, the limit for the phase out of the deduction was increased to $2,000,000 from $800,000.

Extended Net Operating Loss Carryback Period – The number of prior year's taxes that can potentially be recovered by carrying back a current year loss was increased to as much as 5 years. During a year of tough economic hurdles, this change can provide needed cash flow relief if 2010 was a year of losses.

Standard Mileage Rates Adjusted for 2010 – Business owners using their vehicle for company business can deduct 50 cents per mile driven on their 2010 tax return. The rate has also been set for 2011 at 51 cents per mile. The rate for medical miles driven was 16.5 cents per mile for 2010 and 19 cent per mile for 2011, while charitable miles use the rate of 14 cents per mile for both years.

Contribution Limits for IRAs and Other Retirement Plans - Where an IRA contributor who is not covered by a workplace retirement plan is married to someone who is covered, the deduction is phased out if the couple's income is between $167,000 and $177,000.

Increase in ‘Start-Up' Expense Deduction – For 2010, the current deductible amount of new business start-up expenses was increased to $10,000 from $5,000. Any additional amounts must be expensed ratably over not less than 180 months.

AMT Exemption Increased for 2010 – For tax year 2010, the Alternative Minimum Tax exemption for a married couple filing a joint return is $72,450, and $47,450 for single filers. The AMT has also been determined for 2011, $74,450 for a joint return and $48,450 for single return.

Payroll Tax Cut for 2011 – Beginning January 1, 2011, the employee's part of the OASDI portion of Social Security tax was decreased from 6.2% to 4.2%, on the first $106,800 paid to each employee. For the small business owner, the OASDI portion of Self Employment Tax was decreased from 12.4% to 10.4%

Additionally, individuals who are unable to pay the tax that they owe with the return still have some options. Moreover, it is important that the return still be filed on time even if the full amount due cannot be paid. Consider including IRS form 9465, Installment Agreement Request, which will provide additional time to meet the tax obligation. Contacting the IRS at 1-800-829-1040 as soon as possible if additional tax payment difficulties arise is the best advice.

Find out more information about these and other tax law changes for the 2010 tax season at http://www.irs.gov/.